Assignment 2: Route Profitability Evalua8on Michael D. Wi?man Istanbul Technical University Air Transporta8on Management M.Sc. Program Network, Fleet and Schedule Strategic Planning Module A2 : 31 March 2016
Assignment 2: Route Profitability Analysis! Turkish Airlines is considering the Istanbul- Vancouver (IST-YVR-IST) route for introduction of a single daily non-stop flight, as part of its Star Alliance relationship with Air Canada.! In this assignment, you will explore the potential profitability of THY providing non-stop service on this route, using a B777-300ER aircraft.! The worksheet (ISTYVR.XLS) presents a complete profit evaluation of the proposed IST-YVR service for THY showing an annual operating margin of 1.7%.! 2
Fully Allocated Segment Profitability! This baseline evaluation makes use of the concepts of fully allocated segment profitability, based on the following information:! Demand forecasts and average PRORATED fare estimates for Business, Premium Economy, and Economy demand, both local and connecting;" An assumed 70% market share of the local IST-YVR traffic;" Flight operating information;" Detailed direct operating cost estimates for the B777-300ER aircraft, in a 28 Business Class, 63 Premium Economy, and 246 Economy Class seat configuration (337 seats total); and" Estimates of indirect operating costs for passenger servicing, aircraft and traffic servicing, promotion and sales, and administration overhead." What makes this a fully allocated profitability assessment?! 3
Worksheet Structure! Annual Demand and Passenger Revenues! 4
Worksheet Structure (2)! Flight Operating Information:!! Estimated Operating Costs:! 5
Worksheet Structure (3)! Loads and Revenues:! 6
Question 1: Market Share Assumption! The spreadsheet provided to you is based on a relatively optimistic assumption about THY s market share of IST-YVR local O-D traffic.! Use this spreadsheet to determine the deviation from the given value (70%) that will cause the service to become unprofitable, holding all else constant.! 7
Question 2: Network Contribution! Revise the baseline spreadsheet (market share = 70%) to include Network Contribution in the profit calculations, by adding the following estimates of additional network contribution for carrying the connecting passengers on this new flight:! Business: $420! Premium: $230!Economy: $160! 8
Question 2: Network Contribution (Continued)! Describe what is meant by network contribution, and how these values can be interpreted.! Discuss the impacts on the estimated route profits.! Then, use the spreadsheet to find the deviation from the 70% assumed market share of local demand that will cause the service to become unprofitable.! Do these network contribution estimates seem reasonable to you?! What factors would determine the actual network contributions on this new flight?! 9
Question 3: Sensitivity Analysis! Evaluate the sensitivity of the Network Contribution values you added above in Part (B).! What effect does a 10% increase or decrease in Business, Premium Economy, and Economy network contribution per passenger have on the profitability of this route?! Business: $420 +/- 10% Premium: $230 +/- 10%! Economy: $160 +/- 10%! Note: Perform the sensitivity analyses for all three classes simultaneously (that is, increase or decrease Business, Premium Economy, and Economy network contributions all by 10%).! 10
Question 4: Recommendation! Considering the IST-YVR route s profitability estimates and the sensitivity analyses you performed above, provide a detailed recommendation to the Network Planning department as to whether THY should actively pursue this route opportunity.! As a result of your sensitivity analysis, do you think that Turkish Airlines should include network contribution when evaluating route profitability, or rely on a fully allocated segment profitability approach? Why?! 11